North American Free Trade Agreement (N.A.F.T.A)

The Free Trade Agreement, (NAFTA) is an agreement implemented in 1994 as a trade agreement among Canada, United States and Mexico. This free trade agreement is the first agreement among the developing and developed countries thus has been a controversial issue. It was argued that Mexico would gain from this free trade because of its comparative advantage in low wage. Maquiladoras, the factories along the border region of Mexico and the US, have subsequently increased their workers and productions after the implementation of NAFTA. Suggestions are made that the free trade agreement stimulates the Mexican economy. The trade agreement, NAFTA, have been compared with the European Union (EU), but it is distinct from EU since it does not suggest any common, internal or external policies, nor does it suggest any common market. The objectives of the agreement were mainly to facilitate the free exchange of goods and services between the territories, and promote conditions of favorable competition in the free trade area (The NAFTA Secretariat).

The name Maquiladora is a Spanish term “maquila” and refers to an assembly plant located in the US-Mexican borderlands. The term became popular with the implementation of NAFTA, but its origin was back in 1930’s during the time when Mexican government tried to promote the industrialization and economic development of the borderlands through the establishment of free trade privileges in the region. Maquiladora did not suddenly appear with NAFTA, but the agreement increased the number of Maquiladoras between the years 1994 and 1996. In order to receive preferential NAFTA tariffs, a minimum of 50 percent of most products content had to come from Mexico, Canada, or the US. NAFTA eventually provided for a reduction of tariffs to zero for products containing North American content. These significant imports and tariff provision enjoyed by the Maquiladoras were to be phased out by 2001.

NAFTA has been gradually contributing to workers rights. Years before 1994, human rights groups, claimed that the border factories forced women who become pregnant on the job into resigning. However, under the NAFTA law, companies are required to give maternity benefits to employees who have worked in the company for more than seven months. As there are many concerns about Maquiladora workers, Maquiladora factories in Mexico have experienced growth in the past decades. Mexico’s history of international trade and investment started after its economic crisis in 1982. The growth in Foreign Direct Investment to Mexico is paralleled by the growth in Maquiladora industry. Through Maquiladoras program, NAFTA has encouraged foreign businesses to set up factories to produce consumer goods for exports.

A big percentage of Maquiladora workforce were female, however, gender equity and the position of women in the world economy are not mentioned in NAFTA. Addressing the importance of understanding regional situation when implementing a trade policy, Villarreal (2010) pointed that women are often expected to accept lower salaries than men for a comparable labor do. Therefore, though women have paid jobs, gender discrimination at work is not always recognized as a problem in Mexico.

Trade liberalization causes the prices of skill-intensified goods to rise relative to those of the non skill-intensified goods. The resulting shift of employment toward skill-intensive industries contributed to an increase in relative demand in the skilled workforce. This causes the wages of a skilled workforce to increase relative to those of unskilled workers. The price change increases the demand in skill-intensive industries and reduces the demand in non skill-intensive industries. The importance of this price change are: during the 1980’s, Mexico experienced an increase in wage gap between the skilled and non-skilled jobs and higher employment growth in skill-intensify sectors because of higher FDI on skill intensify goods due to lower tariffs on these goods (Hecker-Ohlin theorem). NAFTA provided a further trade liberalization in 1994, which saw wages in states on the Mexico-US border increasing relative to wages in the rest of the country under NAFTA. The encouragement of the free trade encourages the danger of protecting industries from the failure of the import substitution program in Mexico in the past, NAFTA encourages FDI, and this contributes to the economic growth that makes investment in education feasible, and creates skilled workers in Mexico. The labor participation for women has increased in the export processing and tourism areas, and because of the high demand for labor, education and experience do not affect the wages (Anderson & Dimon, 1995).

The effects of NAFTA on the Mexican economy are difficult to isolate from other factors that affect the economy such as currency fluctuation. Mexico’s unilateral trade liberalization measures of the 1980’s and currency crisis both affected economic growth. Although NAFTA have overseen the economic and social benefits to the Mexican economy, these benefits are not evenly distributed throughout the country. The agricultural sector experienced the higher workers displacement after NAFTA because of the increased competition from United States and due to the Mexican, domestic agricultural reforms. On regional effects, some economists argue that while the free trade agreement may minimize income disparities over the long run with other countries, the agreement may indirectly lead to a maximized disparity in income levels within a country. This is because the initial conditions in Mexico appear to determine which Mexican states experienced stronger economic growth because of NAFTA. Over the last decade, the economical relationship among United States and Mexico has experienced a significant improvement, and the two countries continue to cooperate on issues of mutual concern that are aimed at expanding and modernizing border facilities for a secure and more efficient border.